What is a book-building process in IPOs?

The book-building process is a method used by companies during their Initial Public Offering (IPO) to determine the price at which the stock will be offered to the public. This process involves gathering investor demand for the shares and then setting an appropriate price range based on that demand.

1. Overview of the Book-Building Process

In a book-building process, the company and its underwriters invite institutional and retail investors to submit their bids for the IPO shares. These bids specify the quantity of shares and the price they are willing to pay within a price band. The price band is typically set by the company and its advisors based on market conditions and investor demand.

The bids are collected during the subscription period, and once this period ends, the underwriters analyze the demand to determine the final price of the shares, known as the "issue price." This process allows for market-driven pricing, as it reflects investor interest.

2. How the Price Band Works

The price band is a range that is set before the book-building process begins. The company and underwriters decide the band based on various factors, including market conditions and company valuation. Investors are asked to place bids within this range, indicating the number of shares they wish to buy and the price they are willing to pay.

For example, if the price band is set between ₹100 and ₹120, investors can place bids anywhere within that range. The final price, or issue price, is determined after assessing the overall demand. If there is strong demand at the higher end of the range, the company may decide to set the price closer to ₹120.

3. Types of Book-Building Processes

There are two types of book-building processes commonly used in IPOs:

• Fixed Price Method: The company sets a fixed price for the shares, and investors bid for the shares at that price.
• Price Band Method: The company sets a price range (price band), and investors can place bids within that range.

In most cases, the price band method is used, as it provides more flexibility for both the company and investors. The final issue price is determined after analyzing the bids received.

4. Role of Book-Runners

Book-runners are the underwriters who manage the book-building process. They collect the bids from investors, assess demand, and help determine the final issue price. Their role is critical to ensuring the process is carried out smoothly and that the shares are priced appropriately based on market demand.

The book-runners also help gauge investor sentiment, allowing the company to make informed decisions about the IPO’s pricing and size. Typically, the book-runners are investment banks or financial institutions with experience in managing public offerings.